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Hussman: When Barron’s Poll Shows Exuberance, Run Away

The euphoric cover of the current issue of Barron’s signals the bull market’s end is nigh, says John Hussman in his current comment to Hussman Fund shareholders.

“When the cover of a major financial magazine features a cartoon of a bull leaping through the air on a pogo stick, it’s probably about time to cash in the chips,” he writes.

While the portfolio manager and former finance professor has demonstrated rhetorical flair in the past, his current weekly comment puts the Barron’s cover in the context of the entire series of the magazine’s “Big Money Poll,” arguing that it is a genuine contrary indicator.

In 2000, Barron’s reported on its Big Money Poll with the title “Still Bullish!” (and “Dow 13,000” as part of the illustration). The Dow, then valued at 10,7333.91, went on to lose about 40% of its value in the 2000-2002 bear market.

Another buoyant, if more subdued, headline, “Dow 14,000?” was published after Barron’s May 2007 Big Money Poll.

“The Dow did advance another 6% to reach 14,000 by October 2007,” Hussman writes. “By November (the poll is semiannual), bulls were outnumbering bears by 2 to 1, and the headline ran “The Party’s Not Over.” In fact, the market had already peaked, and proceeded to lose over half its value in the 2007-2009 bear market.”

The current Barron’s cover’s title—with the large print headline “Dow 16,000!” is the most bullish yet, mirroring the mood of professional investors surveyed in the magazine’s current Big Money Poll. Writes Barron’s:

“In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks—an all-time high for Big Money, going back more than 20 years.”

Hussman’s letter, titled “The Endgame is a Forced Liquidation,” associates these cyclical market peaks with investor leverage, and points out that margin debt has risen above 2% of GDP for the fourth time in history.

The three previous times include 2000 and 2007—peaks followed by massive corrections; the third instance of such high leverage occurred in 2011, followed by a mere 18% market correction.

Margin debt today “is more than 2.3% of GDP, the highest level in history with the exception of the approaches to the 2000 and 2007 market peaks,” he says, noting the 49% and 57% market losses that followed.

The “forced liquidation” Hussman predicts would result from the “inability of investors to simulataneoiusly exit overleveraged positions that were all based on the same investment thesis.”

That thesis is the current iteration of the “new economy” argument about productivity growth, the Internet, globalization, historically high profit margins.

But, asks Hussman, “with a record 74% of Wall Street strategists now bullish, who is left to embrace further speculation, and how deep will the required losses be to induce the conservative 26% to absorb the overleveraged exposure of the exuberant 74% when forced liquidation becomes necessary?”

The fund manager also ominously notes that plunges in gold shares tend to occur “slightly in advance of plunges in the general market,” seeing last week’s historic single-day 30% drop in the gold market as a “precursor.” Consequently, Hussman notes his funds are fully or partially hedged (depending on each fund’s investment objective).

“Soon enough, I expect that investors will be relieved of the need to desperately reach for yields that are hardly distinguishable from zero. This is not the time to swing at pitches so low that they brush the grass.”